An upcoming federal rule change announced recently by President Obama has the potential of making millions of workers newly eligible for overtime and thereby impacting many of our clients and industry partners. This change, which does not require congressional approval and which is slated to go into effect in 2016, will affect businesses of all sizes and in all industries.
First, a brief history lesson. Federal law, as established by the Fair Labor Standards Act (FLSA), sets minimum standards for wages and hours worked. The FLSA determines four main areas of federal labor law: 1) Minimum Wage, which is currently set at $7.25 per hour, 2) Overtime, which requires time-and-a-half pay for time worked in excess of 40 hours per week, 3) Definitions of what constitutes “Hours Worked,” and 4) Standards for Record Keeping of Time and Wages.
The FLSA was enacted in 1938 and has been amended by Congress over the years to, among other things, increase the federal minimum wage and address treatment of specific classifications of workers (such as the Age Discrimination in Employment Act and the Migrant and Seasonal Agricultural Workers Protection Act). The law applies to all workers except for those employees who are deemed “exempt” from the act. This is where the term “exempt” and “non-exempt” comes from.
“Exempt” employees, often called salaried employees, have long been considered those who are paid a salary, rather than an hourly rate, and thus are exempt from the FSLA’s time-and-a-half overtime rule. Typically, these are high-income, white-collar employees – in the law they are specifically referred to as executive, administrative, professional, computer and outside sales professionals.
The most common type of exemption for businesses is the administrative exemption. That provision requires that, in order to be exempt from the FLSA, the employee must:
Be compensated on a salary or fee basis at a rate of no less than $455 per week;
Have as a “primary duty” the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customer, and
As a “primary duty,” exercise discretion and independent judgement with respect of “matters of significance.”
The FLSA goes on to define many of these terms-of-art such as primary duty, discretion and independent judgment and matters of significance. If you google “DOL Fact Sheet #17” you will find the details of what conditions must be satisfied for a position to be considered exempt from the FLSA.
The one element common for all exemptions to the FLSA is that the employee must be paid a minimum of $455 per week, or $23,660 per year. It is this rule that President Obama intends to change by increasing the minimum pay from $455 to $970 per week, or from $23,660 to $50,440 per year.
The minimum salary level was established to cover all professionals who had highly specialized skills, executive level responsibilities and made significantly higher income than the average worker. The “exempt” salary threshold has remained unchanged at $23,660 since it was last modified in 1975. At the time that it was last increased in 1975, 65 percent of salaried workers earned less than $23,660. Currently, only 11 percent of salaried workers earn less than $23,660. (Source: Economic Policy Institute.)
So what does this mean for you? The financial and administrative impact of this change is likely to be significant. For example, many employers with low- to mid-level supervisory and managerial staff, such as those in the janitorial, service, retail, and restaurant sectors, will see a lot of these employees fall under the newly raised threshold and, accordingly, will have to pay them overtime for any time worked in excess of 40 hours. Here’s what the change will require:
For their exempt employees who currently earn between $23,660 and $50,440 per year, employers will now have to reclassify them as non-exempt and track all hours worked and maintain time and record keeping according to FLSA standards.
For time worked in excess of 40 hours a week, they will need to pay time-and-a-half overtime.
As it currently stands, the rule change is not expected to require that employers pay these employees on an hourly basis – most likely they will still be able to be paid on a “salaried” or annual basis. However, it does require that all time will have to be tracked and that overtime be paid for additional hours in excess of 40 hours a week.
So what does this mean for our clients? We recommend that they take the time now to determine how many employees this rule change will affect and how they plan to implement the necessary timekeeping and overtime payment requirements. We also recommend that our clients do an audit of their existing workforce to determine whether their current salaried/exempt employees truly qualify for the exemption under the FLSA. (Unfortunately, we find that many of our clients incorrectly classify customer service and administrative/offices staff as exempt even though they don’t satisfy the minimum salary or duties set forth under the exemptions. This can leave them open to damages for back pay of overtime and further penalties in the event of a successful lawsuit or regulatory action.)
Finally, one question that we often are asked is whether it is okay to require approval for overtime and whether it is permissible to withhold overtime payment if the hours worked are unapproved. The answer is yes and no. Yes, overtime can require prior managerial approval. And no, you cannot withhold payment of unapproved overtime – the FLSA is very clear that employees must be paid for all time worked, whether approved or not. Instead, employers should treat unapproved overtime as a disciplinary issue subject to the company’s progressive disciplinary process, whereby repeated violations of the overtime approval policy can lead to suspension or dismissal.
While the final rules on this salary threshold are yet to be released, our best advice is to do your research early to find out how many employees may be impacted and develop a plan for managing and tracking employees’ time going forward.
By Claudia St. John, SPHR, President of Affinity HR Group
